The Political Economy of Policy Reform in Southeast Asia Hal Hill Economics, RSPAS Australian Nation

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The Political Economy of Policy Reform in
Southeast AsiaHal HillEconomics,
RSPASAustralian National Universityhal.hill_at_anu.
edu.auFor presentation to conference on
Globalization and Thailand Outside
Perspectives, Bangkok, February 21-22.February
2008
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• (1) Introduction
• (2) Issues and Context
• (3) Southeast Asian Case Studies
• (3.1) Major Reforms Vietnams Doi Moi
• (3.2) Significant Advances
• Indonesian Liberalization, 1982-86
• Trade Liberalization in the Philippines
• Legislated Central Bank Independence, Indonesia
  and the Philippines
• (3.3) Creating New Institutions and Structures
• Philippine Decentralization, 1992-
• Indonesias Competition Commission
• Timors Currency Board
• (3.4) Incomplete Reforms, Mixed Outcomes,
  Setbacks
• Privatization in Indonesia and Malaysia
• Indonesias Financial Reforms
• Tax Reform in Indonesia and Malaysia
• The Waning Influence of Technocrats Indonesia,
  Philippines, Thailand

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• 'Political scientists ... are preoccupied with
  the distributional effects of policy cui bono?
  Who are the beneficiaries? Whereas economists, in
  their innocence, worry about the best ways of
  improving social welfare, raising the living
  standards of the whole community, political
  scientists are fascinated by the struggle for
  shares.' (Arndt, 1994)
• The literature on the political economy of trade
  liberalization emphasizes the interplay of
  ideas, interests, and institutions. (Bhagwati,
  2002)
• Countries cannot be transformed without the
  generous and farsighted involvement of the
  international community. (Sachs, 1994)
• The leadership of Viet Nam did not decide to go
  market because of any kind of ideological
  conversion from Marxism-Leninism to capitalism
  instead it discovered the hard way that the
  alternative to a market economy does not work.
  (Riedel and Comer, 1997)
• Turning points are invariably associated with
  macroeconomic crises. (Lal and Myint, 1996)
• The real tragedy of the IFIs policy
  conditionality in Africa was not that the
  demanded policy changes were wrong, but that
  attempts to impose policy change from outside
  hardened resistance to them. (Collier, 2007)
• Thus far, the most successful economic reform
  efforts have been merely those that remove
  restrictions on competition far more complicated
  are initiatives requiring sustained
  administrative capacity. (De Dios and Hutchcroft
  (2003) on the Philippines.)

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• (1) Introduction
• Economists (think they) know what to do much
  less clear how to get there.
• Why and how to reform successfully one of the
  keys to econ devt.
• Southeast Asia - great diversity, fertile
  territory.
• (2) Issues and Context
• Reform significant, durable policy reform that
  advances aggregate socio-economic
• welfare. Outcomes and processes. Objectives?
• Big bang v/s incremental reforms turning
  points zig zag reform. SE Asian
• examples of each.
• Nature of reforms varies a lot stroke-of-the-pen
  deregulation, to complex
• admin/implementation. Eg, removing QRs to tax
  reform.
• Drivers. Why reform?
• a) Crisis hypothesis, Olsonian hypothesis. Works
  sometimes.
• Twin crises difficult to navigate.
• b) Ideas are crucial. A clear reform agenda.
  Often outside govts. Unity crucial
• (Boediono).

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• d) Bureaucracy Diversity reluctant reformers?
• e) External actors and factors
• Exogenous shocks (crises).
• Ideas analytical training. (Berkeley Mafia,
  Chicago Boys)
• Competitive liberalizations (Pangestu).
• Donors IFIs mixed evidence like aid in
  general, works when countries are
• predisposed to reform.
• f) Reforms need to be comprehensive.
• Eg, trade reform requires macro stabilization
• need to win over constituencies
• different reforms different timetables.
• Higher potential for policy change for regimes
  with a low dispersal of power?
• (MacIntyre)
• (3) Southeast Asian Case Studies
• Concentrated mainly in Indonesia, Philippines,
  Vietnam.
• Less (major) policy change in Singapore,
  Malaysia, Thailand largely open
• with consistently good macro.

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• (3.1) Major Reforms Vietnams Doi Moi
• Important success in very difficult
  circumstances - decades of war,
• international hostility, weak technocracy,
  cessation of Soviet aid.
• Ingredients Learnt the hard way (Riedel)
  observing China loss of aid
• gradual but produced results good fortune (oil)
  strong (hard?) state.
• (3.2) Significant Advances Indonesia in 1980s
• Comprehensive averted a debt crisis started
  with macro, then micro.
• Why? Trigger was looming crisis (oil price
  collapse). Technocrats united, had
• a coherent plan. Persuaded Soeharto then in
  supreme control. Style
• important Hadis low politics. Donors helpful
  neighbours reforming.
• Effectively implemented produced results
  quickly.
• See Table 1 for special case of trade
  liberalization arguably the most
• important once had macro stabilization and
  realigned exchange rates.

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• (3.2) Significant Advances Trade Liberalization
  in the Philippines
• Eventually as effective and durable as Indonesia.
  But much slower, 15 years,
• deep crisis, three administrations, from
  authoritarian to democratic rule.
• Key driver was the econ profession, UP/PIDS.
  Gradually spread through govt.
• Then adopted by a vigorous reformer (Ramos).
  Comprehensive reforms with
• a growth dividend.
• Also sense that falling behind neighbours
  IFIs, and retreat from US military
• alliance useful at the margins.
• Though paradox (in post-Soeharto also) that,
  while won the battle for
• manufacturing (and increasingly services),
  agriculture now a problem.
• (3.2) Significant Advances Central Bank
  Independence
• In both RI RP, after crises. Learned lessons
  from crises.
• Both part of IMF packages but primarily domestic
  origins.
• Key point that all major policy players have a
  stake in the outcome.
• Similarly for 2003 RI Fiscal Law. Here exit from
  the IMF program used to
• persuade the president (Megawati).

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• (3.3) Creating New Institutions Structures
  Phils Decentralization
• Major program, one of first in Asia. Triggered by
  political crisis.
• Clear rationale well formulated. But marginal
  (positive) impacts.
• Why? Frustrated by CGs (a) unwillingness to let
  go (b) inability to enforce
• clear rules of the game (c) fiscal near crises
  (d) weak implementing agency.
• (3.3) Creating Indonesias Competition
  Commission
• KPPU unpromising beginnings - part of IMF LOI
  interpretation of monopoly
• in Indonesia govt and bureaucracy greatly
  weakened no tradition of
• independent authorities.
• Imposed on Indonesia, but domesticated. Worked
  effectively. Operated in low
• key manner avoided political vendettas.
  Monopoly a topical issue.
• Suited both govt and parliament to have
  arms-length agency.
• (3.3) Creating Timors Currency Board
• An example of effective IMF input. Helped
  persuade/educate the interim

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• (3.4) Incomplete Reforms, Mixed Outcomes,
  Setbacks Privatization in
• Indonesia and Malaysia
• Strong case for reform inefficient, vehicles of
  patronage, etc.
• Indonesia very little privatization, even during
  1980s political c/b analysis.
• Malaysia major privatizations since 1983 but
  hijacked by Bumi interests.
• Why so difficult? (a) bureaucratic resistance
  patronage (b) local-level
• resistance (Cemex) (c) ethnic politics,
  especially when much else liberalized.
• Reformers if cant have clean sales, best not to
  sell?
• A case where reformers forced to adopt second
  best solutions
• Ensure competition impose hard budget
  constraint open subsidies.
• (3.4) Incomplete The Waning Influence of
  Technocrats
• Evident in Indonesia, Thailand in pre-crisis
  1990s, Philippines from late 1970s.
• Indonesia technocrats less needed accidents?
  rise of Habibie, kids.
• Thailand (Ammar) BoT, MoF gradually weakened
  less needed in time of
• abundant finance erosion of civil service
  conditions.
• Philippines rise of cronies, private ( IFI)
  funds from mid 1970s.

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• (3.4) Incomplete Labour Policy after Crises
  in RI RP
• Both, especially Indonesia, swung from regimes of
  limited intervention, repression, but
• growth in productivity wages to populist,
  restrictive policies, pushing up minimum
• wages, etc. Predictable effects on employment
  growth, etc.
• Why? Part of swing from authoritarian to
  democratic regimes. Intrusive IMF policy
• conditionality elsewhere. Labour portfolio often
  given to activists. Technocrats
• elsewhere occupied. General intellectual
  ambivalence on labour at a time of crisis.
• (3.4) Incomplete Making Policy after Twin
  Crises
• Special problems when have combined economic and
  political/institutional crisis.
• Creates policy vacuum and weakened states. Former
  USSR.
• Indonesia in 1998, Philippines in 1986
• Economic contraction 13-15 weakened executive
  less cabinet unity assertive,
• unpredictable legislature noisy civil society
  bureaucratic adjustment plus fiscal crisis
• legal system underdeveloped decentralization.
• Results increased institutional uncertainty
  technocrats limited role policy processes
• long and uncertain.

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• (3.4) Incomplete
• (to come)
• Indonesian Financial Reforms
• Industry Policy in Indonesia and Malaysia
• Tax Reform in Indonesia and the Philippines
• Legal Reform in Indonesia

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• (4) Tentative Generalizations
• No one-size-fits-all. But recurring, interactive
  themes
• a) Ideas that drive an intellectual agenda. Plus
  a group of individuals, united, able to
• sell the message. Need to be patient (Phils,
  India). Often (generally?) outside govt
  initially.
• b) Political leadership essential. Comes in
  different guises.
• c) External factors mixed, but at least some
  generally present - demonstration effects
• of successful reformers exogenous shocks.
• d) Need to be comprehensive, deliver results
  though at different speeds. Macro
• stabilization the bedrock increasing openness
  central.
• The bureaucracy?
• Generally not a formulator, but crucial for
  implementation.
• General presumption is a reluctant reformer loss
  of rents, etc. But depends on
• a) Relative strengths of executive and
  bureaucracy - presidential v/s parliamentary, etc
• b) Relative strength of reform-minded sections -
  finance, central banks, etc.
• c) Nature of reforms - scope for by-pass but
  needed for some measures.
• Note also

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• (4) Tentative Generalizations (cont)
• Foreign aid IFIs? Mixed evidence effective
  when have reform-oriented regime.
• Can donors influence the reform agenda?
  Conditions-based lending uncertain.
• Perhaps more effective to work discreetly with
  agents of change training.
• Is aid an obstacle to reform? (Easterly, Hughes)
  Generally not though its absence
• often pushes reform.
• Big bang v/s incremental? Difficult to
  generalize. Macro stabilization a pre-requisite,
• generally have to move quickly. Trade reform
  requires some adjustment. Tax reform
• often medium term.
• Authoritarian, centralized regimes can move more
  quickly though reforms may be less
• durable.
• Also depends on political circumstances eg,
  Indonesia in 1980s, not sure how long
• had Soehartos support.
• Backtracking? On big picture, rarely -
  Sachs-Warner (1995) on trade regimes Hill
• (2007) on FDI regimes. So why are growth rates
  volatile? Reform fatigue can set in
• macro can undermine good micro (eg, Phils). Plus
  exogenous shocks.